The outlook on long-term ratings for Indian banks remains stable in 2011, after a negative bias in 2009 following the credit crisis, said Fitch Ratings.
The stable outlook reflects easing asset quality concerns, together with an improving loan loss reserves position and expectations of further infusions of common equity by the government, said the Fitch report.
India's strong growth environment and improved corporate credit profiles are likely to ease asset quality concerns for a large part of banks' loan portfolios, although a few vulnerable sectors, including commercial real estate, may see rising delinquencies.
Fitch expects profitability to exhibit neutral to negative trends. Narrowing net interest margins in a rising interest rate regime is likely to moderate profit growth, but this will be balanced by a possible reduction in provisions as non-performing loan accretions begin to ease.
Higher pension provisions could be a drag on the profitability of public sector banks, although the quantum and the accounting treatment are yet to be announced.
Strong loan growth may result in a rising proportion of wholesale funding, partly from refinancing institutions. While some of these are long-term in nature, the overall funding profile could deteriorate if short-term non-repo borrowings are used to boost balance sheet size, Fitch said.
Banks with improved competitiveness and tested risk management systems may see upgrades in individual ratings and, in some cases, in national long-term ratings.
Though unlikely now, above average loan growth and sharp rises in system interest rates together with any macroeconomic shock could result in the outlook turning negative for some banks, the report said.
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